Written by: danny

This article aims to tell all project teams that it's not only through high control (96%+ control of tokens) and pump-and-dump schemes that liquidity can be attracted and generated. Serious builders, by leveraging the inherent inertia of the mechanism, can forge their own path through the crypto bear market. Trading isn't about racking up points or chasing airdrops; it's about making money. Some use token structures (controlling tokens), some use narratives to extort money, some seek VC endorsements, some find MMs (market makers), but this article tells you:

Using mechanisms

Between $300 million and $800 million flows annually from project teams to market makers, hidden within contracts called token loans and call options. This article dissects the financial principles behind this money, demonstrating how funding generated by the structural biases in the PERP market flows back to token holders through two-way lending protocols, and providing a specific self-rescue checklist for project teams during bear markets.

Foreword:

I'm building a protocol for the mechanism described in this article ( youcanshortit.com ) , and it's already running. This article is something I wrote as a builder for project teams who are also anxious—if you don't care about my perspective, you can read it as an industry commentary; if you do care, you can skip to section six for the practical checklist.

I. What are project teams experiencing during a bear market?

If you're a project team member diligently working during a bear market, your desktop probably looks like this:

The agreement is still generating revenue every day—potentially $500,000 over 30 days, up 18% year-over-year, so the fundamentals are good.

However, the token price has been trading sideways for 60 days, trading volume has dropped by 70% from the TGE high, and the order book depth of ±2% is only tens of thousands of dollars.

Every few weeks, the exchange's operations department sends a message: "Your token's 24-hour trading volume and depth have consistently fallen below the listing maintenance standards. We recommend replenishing your market-making budget or changing your market-making plan; otherwise, it will be delisted." (As a project team member, I personally receive calls from the exchange every few days demanding "protection fees.")

If you ask the market maker—the one you lent 3% of your token supply to 12 months ago under a 12-24 month contract—his reply is: "We're placing orders according to the contract. The market environment is bad, and there's nothing we can do. The depth agreed upon in the contract may not be sustainable either. Please understand."

At 3 a.m., you stare at the dashboard, with only four sentences in your mind:

The protocol is clearly progressing with the build, but the price is just not moving. The exchanges are pressuring us again. Is the only solution to spend money on inflated trading volume?

Actually, there's more than one road. But to see other roads, you first need to figure out which road you're on right now.

Second, the MM contract you are signing is actually a derivative product.

In a bear market, the instinctive action of project teams is to "sign another market maker." This is a very expensive move, and most project teams are completely unaware of it.

The most common structure of market-making contracts in the crypto world is called the Loan + Call Option Model —you "lend" 1-5% of the total supply of tokens to the market maker for a term of 12-24 months, and the contract includes a call option clause: they can buy these tokens at the agreed strike price when the contract expires.

Sounds good? You don't have to pay a monthly fee; the coins are simply "lent out." But in a financial sense, this contract is a derivative transaction that is extremely disadvantageous to you.

Assuming a TGE price of $1, lending out 10 million tokens (approximately 1% of the supply), a strike price of $1.50, and a term of 12 months, altcoin's implied volatility is typically 100-200%. Substituting this into Black-Scholes theory, the present value of that call option is 30-50% of the underlying asset's notional value.

You unknowingly gave away financial instruments worth $3 million to $5 million.

Worse still, this figure is opaque and undisclosed; you don't even know what the market makers are doing with your tokens. The total amount that small and medium-sized projects in the entire crypto market pay to that small circle of market makers through this mechanism each year is conservatively estimated to be in the range of $300-800 million.

What's even more dangerous in a bear market is that after you've paid this hidden cost, the market maker might still try to shirk responsibility during the contract period. You've likely received responses like "The market environment is bad," "The depth agreed upon in the contract can't be maintained," and "Please understand." You've paid $3-5 million and received only a "Please understand."

To break free from this structure, we must first understand what those scattered energies are.

Third, hidden within the perpetual contract structure is a sum of money you haven't seen.

Everyone in the crypto world has heard of perpetual futures, but few realize that there is a structurally existing sum of money in the altcoin market that no one can reliably take away .

Perp is pegged to the spot market through a funding rate algorithm. Settlement occurs every 8 hours: when the Perp price is higher than the spot price, long positions pay short positions, and vice versa. The theoretical baseline is 0.01% every 8 hours, annualized at 10.95%—this is the level when Perp is fully pegged.

Funding Rate (F) = P + clamp (I -P ,max_rate, min_rate)

The interest rate (I) is typically 0.01%.

However, actual funding is determined by market sentiment. Generally, altcoins are predominantly bullish (but in the current market environment, bears are dominant), and funding consistently exceeds the baseline—a typical mid-sized altcoin has a stable annualized funding rate of 10-50%, exceeding 80% during periods of strong sentiment, and potentially surging to 200%+ during periods of popularity or major events (e.g., $alpaca ) .

With the combination of market sentiment and the perp anchoring mechanism, the funding rate that short sellers can continuously obtain from long sellers each year is one to two orders of magnitude higher than that of BTC and ETH.

This is a structured sum of money. The question is—who can take it away?

In theory, anyone can use cash-and-carry arbitrage (holding spot and shorting perp). Ethena's sUSDe achieved a peak TVL of nearly $5 billion on BTC/ETH, essentially executing this arbitrage at scale. However, almost no one does it on altcoins—the spot market depth is shallow, slippage is high, and there's a lack of complete prime brokerage services.

The key to unlocking: turning token holders into short sellers.

There are already a large number of spot holders on altcoin—project treasuries, foundations, early investors, DAO treasuries, and long-term holders. They hold a large amount of spot assets (delta = +1), and only need to open a perp short position (delta = -1) to receive funding in a delta-neutral manner.

However, opening a short position in PERP requires USDT margin, and they only have tokens. The only option is to sell their tokens for USDT—but selling would mean losing directional exposure, which they are unwilling to do.

This is the specific problem the design aims to solve: allowing holders to open a PERP short position without selling their coins.

Reverse product: Use tokens as collateral to borrow USDT to open a PERP short position (aka hedging operation).

Token holders pledge their tokens to the protocol → borrow USDT → use USDT to open a PERP short position.

The goal of this mechanism is (in this case, to approach) delta neutrality. Let's calculate:

• Collateralized tokens (still belong to the token holder): delta = +1
• Borrowed USDT and liabilities: delta neutral
• perp (empty position): delta = -1
• Net delta: To achieve 0, it requires perp (notional value of empty positions = value of staked tokens).

There's an engineering limitation here : collateralized lending protocols cannot use 100% LTV (no liquidation buffer). Typical LTV is 60-80%, meaning that staking 100 USDT worth of tokens will only allow you to borrow 60-80 USDT. The direct result is that, in a single collateralization transaction, the token holder will retain 20-40% directional exposure.

To approximate true delta neutrality, there are three engineering paths :

There is no such thing as "risk-free funding"—every path has a real trade-off .

Regardless of which path you take, the core financial phenomenon holds true— altcoin holders can generate cash flow for the first time without selling their coins .

The opposite is only one side of the story; there must also be a positive side.

Inverse products solve the problem of "coin holders eating funding." However, another structural aspect of the altcoin market is the lack of short-selling power —shorting on altcoin only has two paths (opening a perp short position to bear funding losses, or going through a CEX lending platform which is closed to retail), resulting in a natural shortage of short-selling power.

Forward product design:

USDT collateral → Borrow tokens → Immediately sell (establish a spot short position)

This service serves three types of customers:

• Market makers hedge their long positions in PERP (passively accumulated). Market makers cannot hedge their long positions in PERP with short positions (funding creates a self-circulating loop); they must engage in spot short positions, therefore they must borrow tokens to sell.
• Directional short sellers use tokens to sell and bet on a decline.
• Reverse cash-and-carry arbitrageurs (when funding is negative) borrow tokens to sell and open a PERP long position to collect negative funding.

Case study: https://x.com/agintender/status/2050125087320490227?s=20

The common thread among these three types of customers is that they "borrow and immediately sell"—which is completely different from "borrow and hold." Lenders in the token lending market earn their profits from the borrowing interest rate, which comes from the premium on the genuine borrowing and lending needs of these three types of customers.

Two-way products: closing the loop of altcoin's financial mechanism.

Put the two sides together—

Mechanism flaws : Altcoin bullish sentiment + perp anchoring = long-term positive funding. Product flaws : The two-way protocol allows for the first large-scale execution of two delta arbitrage strategies on Altcoin – conversely, it allows token holders to receive funding, and positively, it allows short-selling forces to enter the game. Flaws : Short-selling entry + token holders' cash flow incentive to continue holding = first-time balance between bullish and bearish forces. Liquidity : Bullish-bearish balance → real price game → real liquidity.

Each interest payment has a clear financial source—funding for inverse products comes from the funding rate between long and short positions (PERP), while borrowing interest for forward products comes from the borrowing demand premium. The two products have independent cash flows , but are both driven by the same thing: bullish sentiment in the altcoin market.

The most desperate moment for project teams during a bear market is when the protocol is generating profits, the coin price remains stagnant, the order book is empty, and market makers are indifferent. The root of this despair is not that the market dislikes your project, but that there is no mechanism to gather the scattered financial energy in the market onto your token .

The token loan + call option model promised to do this, but it failed—market makers collected $3-5 million in hidden options, but they had no incentive to truly activate the market during the bear market.

The new mechanism requires no intermediaries—it directly leverages the perp algorithm, altcoin sentiment, market maker demand, short seller motivation, and holder yield desire, with these five forces naturally converging through a two-way product.

IV. What does this mean for the project owner?

Specifically, regarding the benefits—

Positive pool deposits : 3-8% annualized return for lenders during the self-driven period, and 15-25% annualized return including token incentives during the cold start period.

Reverse collateralized products : Typical steady-state yield is 10-30% (depending on funding level, LTV, USDT lending costs, and engineering path), with peak funding yields exceeding 40%.

A $100 million FDV project can activate 10% of its inventory ($10 million worth of tokens) through a combination strategy, generating $300,000 to $1.5 million in "passive cash flow" annually. Over three years, this is equivalent to a round of strategic financing.

To be honest, this yield is not entirely comparable to stETH. stETH comes from PoS staking, with stable returns at the infrastructure layer; the funding yield of inverse products depends on market sentiment, is highly volatile, and may approach zero in a deep bear market. This is a tool to transform token holders from "completely naked longs" into "hedging to reduce volatility + collecting funding," not a risk-free yield.

This is also beneficial for market makers (especially independent market makers and arbitrage traders) – they no longer need to go through the token loan + call option channel to request tokens; they can directly borrow tokens from the positive pool and pay at the market interest rate. However, there is a trade-off: traditional market makers do not need to lock up USDT, but under the new mechanism, they need to be collateralized with 60% of their LTV (hedging 1 million perp long positions requires 1.67 million USDT collateral). The migration will be gradual, depending on the capital structure – this article does not assume that all market makers will switch overnight.

Most importantly, it can stimulate liquidity and trading activity through multi-party competition, and this liquidity and trading opportunities are organic, driven by underlying logic and interests, rather than by subsidies and incentives.

The logic of the entire market has been reversed: previously, project owners paid market makers to "use" their inventory, but now demanders in the market are paying to "borrow" project owners' inventory.

V. Cold starts require real money.

Experienced project teams would ask – if this mechanism is so good, why hasn't it taken off in the past ten years?

The answer is that a cold start is too difficult. Every lending protocol faces the chicken-and-egg problem: lenders won't come first (0% utilization, 0% return), and borrowers won't come first either (no tokens in the pool). Compound relied on COMP, Aave on AAVE, and Curve on CRV—every successful lending market started with substantial early subsidies.

However, the cold start of this market has a special path: it does not need to subsidize lenders and traders, but it does need to subsidize the first batch of borrowers and the first batch of collateralizers .

Dear project owners, you are the first batch of mortgagees.

Positive pools use token incentives to make early borrowing rates significantly lower than market levels, attracting market makers, arbitrage traders (incentivizing them to switch), short sellers (building positions at lower rates), and builders (creating products based on the pool).

The reverse pool incentivizes altcoin holders to take on liquidation risk by opening perp empty positions to receive funding through protocol token incentives.

After the first batch of borrowers and stakers enter the market, the utilization rate of the positive pool increases, driving up lender yields, while the negative pool generates real funding yield data. Only when this step is reached will "holders see a natural influx of yield" truly happen —because yield is no longer a promise, but a fact proven by real demand and real funding.

The entire cold start logic:

Token incentives attract the first batch of borrowers and stakers → Real demand and funding drive up lender yields → Lender yields bring in retail capital → Liquidity pool size expands, incentives decrease → The market enters a self-driving state.

Compound, Curve, GMX, and Hyperliquid have all taken this path—essentially, using early token dilution to exchange for later protocol scale. If the flywheel can be maintained after incentives are phased out, PMF (Programme-to-Factory) is established; if TVL (Total Value Limit) collapses as soon as incentives stop, it means that market demand was never sufficient, which is not what this mechanism is meant to achieve.

For project owners : You can't wait for a "perfect agreement" to appear. What you can do is participate in the early stages of the cold start and enjoy the complete yield curve from cold start to self-driven phase. Early effective yield is much higher than in the self-driven phase—this is the "original bonus" of the cold start period. Also, don't subsidize transactions, subsidize mechanisms.

VI. Project Team's Specific Action List

Checklist 1: Review your existing market-making contracts

Open the contract with the market maker: How many tokens did you lend (usually 1-5%)? What was the strike price? What was the term? Calculate the embedded option value using Black-Scholes (estimate implied volatility at 100-200%). How did the market maker actually perform in a bear market?

If you've already paid $3-5 million in hidden costs but all you get in return is "please forgive me"—you need to reassess the true return on this collaboration.

List Two: Assess the Interest-Generating Potential of Your Inventory

Vaults, vesting pools, DAO treasury, early investor shares—add these numbers together. You'll likely find a large number of tokens sitting idle for a long time with zero yield. These can be activated in two ways: deposit them in a positive pool to earn borrowing interest (3-8% during the self-driven phase, 15-25% during the cold start phase), or use reverse products as collateral to earn funding (10-30% in a stable state, 40%+ at peak times).

List 3: Identifying truly usable protocols

• Does the product offer a two-way option (positive token borrowing + negative token collateral to borrow USDT to open a Perp short position)? A positive option alone is incomplete because it prevents Perp funding from flowing to token holders; a negative option alone is also incomplete because it prevents short-selling forces from entering the market.
• How is delta neutrality achieved for inverse products ? Is it through simple partial hedging, or perfect hedging using PERP leverage compensation? An honest agreement will clearly tell you the engineering path, rather than vaguely promising "risk-free funding."
• Are the borrowing rate and liquidation line linked to perp funding and token volatility?

List 4: Evaluate entry strategies during the cold start period

What is my token's FDV? How many USD does a 1-3% staking activation mean? What are my psychological expectations for both scenarios: tokens being borrowed from the positive pool for shorting vs. staking in the reverse pool to open a perp short position? Is the risk-reward acceptable given the higher early yield but the associated early protocol risk?

List 5: Renegotiate with your market maker

Regardless of whether you ultimately participate in the open market, you should renegotiate the contract . New bargaining chip:

• "Your hedging no longer depends on my token."
• "Our contract should be a retainer plus a performance bonus, not a token loan plus a call option."

Having this alternative plan alone significantly strengthens one's negotiating leverage. This is the lowest-cost step to save oneself in a bear market —simply changing the contract structure can save millions of dollars in hidden costs annually.

VII. After the Bear Market

Bear markets always end. The question is, in what form will your project enter the next cycle?

Following the old path—continuing to sign token loans + call options, continuing to give implicit options to market makers, continuing to receive "apologies" in bear markets, and continuing to reap the benefits of rising prices in bull markets.

The new path involves your token inventory generating its own cash flow, with market depth supported by genuine short-selling power and arbitrage demand rather than paid maintenance. When the next bull market with soaring funding arrives, the funding received by the tokens staked in your inverse product will increase significantly, and the activity of market makers and short sellers in the positive pool will rise simultaneously—your token will enter a positive cycle: poor mechanism drives poor product, poor product drives poor game theory, poor game theory drives liquidity, and liquidity drives a new round of holders to enter the market .

One of the most profound lessons the crypto industry has learned over the past decade is that all interpersonal-driven financial businesses will eventually be replaced by open, mechanism-driven protocols. Uniswap replaced some market makers, Aave replaced some lending platforms, and Hyperliquid replaced some centralized PERPs. Each time this replacement occurred, the industry claimed "institutions have real value." Each time, institutions ultimately had to adjust their positions.

Token lending plus call options represent the last vestige of institutional privilege. It has existed for a decade because no one has seriously filled the gaps in the infrastructure of "open lending + reverse products." Once these gaps are filled, market-making capabilities will be distributed from ten institutions to anyone holding a token.

But the real significance of this is greater than "breaking the market maker." It transforms the largest category of idle assets in the crypto market—long-tail altcoin inventory—into interest-bearing assets. For the first time, "holding" can generate cash flow. It turns the project team's treasury, foundation reserves, early investor shares, DAO treasury, and long-term holders' wallets from silent book value into active, productive capital.

In a bear market, project teams' self-rescue strategy isn't essentially about cutting costs—it's about increasing revenue. It's about getting back the money you previously gave away, activating your previously idle assets, and channeling the funding generated by the structurally biased market structure of PERP tokens to your own token holders through reverse products. It also involves ensuring that genuine short-selling and hedging demands in the market are paid into your own token inventory through positive pools.

At 3:47 AM, the project team staring at the dashboard should have known that since the protocol was making money , the tokens should also be making money.

But for the past decade, no one has turned on this switch.

Finally, it's not only through high control (99% control of shares) that pumping the market can attract and generate liquidity; serious builders can also leverage the inertia of the mechanism to forge their own path.